The Cost of Jobs

An entrepreneurial group just published the results of a survey conducted on entrepreneurial efforts to create jobs over a 20-year period in one state/region. The group that performed the survey and published the results is not the point of this article, nor is the state. What I want to highlight is the importance of looking beyond the numbers to the implications of them.

Over a 20-year period approximately $7.7 billion were invested in entrepreneurial companies, through private investment from individuals, venture groups and foreign sources (including China). There were approximately 41,000 jobs created. Many of these companies have also received millions in government funding from research grants, tax credits and other funding assistance mechanisms.

What the statistical report did not disclose was how many companies were started, invested in and failed in the same period. If extrapolating using current statistics for start-up companies from the state that was studied, then over the course of 20 years 36,000 companies were started, and this survey examined 1,800 that remained.

What was total investment in the companies that failed? We won’t know, at least from this report, but it would be easy to assume that it was at least double that of was in the successful companies.

A typical success rate of entrepreneurial companies that require outside investment (like venture capital) is 1 in 12. Over the 20 years based on that statistic there were a total of 21,600 companies invested in. The 1,800 companies that made it to the survey are to be commended for beating the odds. What can we do to improve our success rate and reduce the cost of investment in job creation?

– Make capital easier to access in a competitive system

o Many potential private individual investors are never invited to invest because they do not meet the government’s definition for being an “accredited investor.” Net worth and annual income figures say it is too risky for companies to deal with these individuals (though some companies do) because they are “unsophisticated” and not knowledgeable enough to make informed decisions on the risk of an early stage/technology-start-up company based on information provided by the management and founders of the company…

– Limit the number and amount of government funds that can be received without a commercial product being developed

– Realize that if we are going to be “global” in competition and the “standards” for doing business then “global” wage levels are relevant; price pressures apply to wages across borders if you are competing across borders.

We also need to remove barriers to investment from our own government, particularly with regards to taxation. Referring back to the survey, excluding government dollars, the investment cost for each job was roughly $189,000. If we credit back the income tax impacts—assuming that these jobs averaged at least a median income of $36,200 over the 20-year period—these jobs returned to the economy roughly $43,000 in state income taxes.

If it takes $200,000 of private-sector investment to create a job (and we need millions of jobs), then we must have private funds to invest. Increasing tax rates on the job creators—entrepreneurs and their investors—is not logical. Taking more money out of the economic system through increased taxation has the opposite effect to job creation.

At a national technology conference held in January in the Research Triangle Park of NC, one of the speakers focused on the ability to create jobs and fund new innovations and entrepreneurial companies. His points:

– More and more funding is coming from overseas sources.

– Investors are becoming less “entrepreneurial” and are reluctant to invest early in new technologies.

– Fewer companies are able to obtain funding because the risk/reward equation is pushing domestic investors to later stages of the investment process.

– Dependence on government funding assistance is hampering technology and innovation companies, because the companies chase government-directed funding opportunities versus pursuing private funding to commercialize and go to market.

A news story on February 27, 2012 in the British newspaper The Telegraph points out a lesson that is coming at a high cost: Governments cannot continue to spend money they do not have to “create jobs.” Furthermore, these job creation efforts have contributed to the decline of job creators, as they can’t afford it with a growing tax burden on income and wages that is steadily increasing the cost of doing business. If the economy of individual countries and the world is to turn around and create jobs, then it is necessary that the private sector be enabled to create the needed jobs.

Whether it was the intent or not, government assistance programs have been contributing to the disruption of the flow of funds to private companies on a number of fronts:

– High-risk funding of research and development is increasingly seen as “government’s” role.

– Increased tax burdens increase the cost of doing business and shift funds available for investment to government programs via taxation.

– Winners and losers are chosen not by market forces but by artificial government intervention.

For the cost of job creation to decrease, then the mechanisms and business models used to fund the job creators need to be open market solutions. The trade-off of relatively small amounts of funding available for high-risk research via government sources versus the increasing need to have early investment from private entrepreneurial sources is increasingly apparent; fewer companies raise entrepreneurial capital in smaller amounts from private sources when government funding is available. Government funding has ceased to be additional funding and is quickly becoming the sole source of initial “investment” for many start-up technology organizations.

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